With risk trends still on the rise and the economic docket quiet, there was little to curb the slide that the dollar found its way into through the second half of last week. However, we need to take a harder look at the fundamental role the greenback plays in the global markets. We could very well see a permanent shift in the benchmark’s place in the risk spectrum and thereby an unusual performance bias going forward: a bullish predisposition. As the world’s most liquid currency (asset) - backing the largest economy and regulated market - the dollar has a permanent position as a safe haven in tumultuous times. For the FX traders, that means any disorderly unwinding of risky positioning across the capital markets will send capital rushing back through the dollar to ultimately seek refuge in Treasuries, money markets or some equally deep pool. In other words, if the S&P 500 and carry trade tip into aggressive bear waves, the dollar stands to be the primary beneficiary.

That said, it is the alternative argument in this scenario that is in flux. What happens should risk trends maintain their bullish trajectory? The dollar’s performance over the last three days may suggest that the traditional link negative correlation to equities and other beta-adhering assets, but we shouldn’t be so quick to fall back into easy assumptions. In the weeks that preceded this three-day correction, the currency was clearly challenging that assumption. Though we have come to assume ‘safe haven’ ideal translates into losses on days were risk trends swell, that is not a guaranteed connection. A safe haven does not necessarily meet the preferred criteria of a funding currency - the link that carries a currency (like the yen lower) in stable conditions that leverage the appetite for yield. We are still a long way away from calling the dollar a carry currency again, but the subtle shift in Fed policy expectations (from a certain of QE3 to expectations of a tightening effort in the next move) will do more to discourage investors from tapping stimulus-bloated, US funds to finance higher-yield investments. The fear that a withdrawal of capital from the system will boost yields would spell a contract in differential and potential exchange rate losses. The 9-day rally in the 10-year Treasury yield (the longest run since 2006) is strong evidence of that trend. That said, it is still far too early to call this a permanent trend.

The euro managed an advance against nearly all of its counterparts (with the exception of the Canadian and Swiss currencies, crosses that were virtually unmoved). Progress in general was as lacking here as it was across the board – a reflection of the hazy outlook for key fundamental catalysts and themes. For positive cues this past session, bulls could have found encouragement from the completion of the Greek default swap auctions as well as the successful sale of €1.5 billion in 20-year EFSF bonds. However, it’s prudent to remain cynical and preparing for the likely-April election in Greece as well as the additional rescue fund bond auctions scheduled for this week (perhaps three more). Furthermore, we should keep constant vigilance in the health of the region’s financial system and the ‘other’ periphery Euro Zone members.

Australian Dollar Weighs Mining Tax, RBA Minutes and Risk Trends

There were a number of fundamental touching points for the Australian dollar to react over the past 24 hours, but what was the currency really taking its cues from? First, there was the announcement that Parliament had approved legislation to push forward a 30 percent tax on large mining companies’ profits. This has been a contentious, political sticking point for the past two years; and there are some who believe this will diminish the commodity producers competitions while the proponents think it will help in funding a broader corporate tax rates. But, does it have an immediate impact for the exchange rate? Not likely. This morning, there was another fundamental hot spot for the carry currency: the RBA minutes. That said, the statement essentially echoed what Governor Stevens said previously. Nothing there. Yet, if you look at the intraday correlation between equity futures and AUDUSD, the same restrained swings seemed to play out. Coincidence? No.

British Pound Advances at Both Ends of the Risk Curve, Osborn Gives Budget Hints

The sterling managed gains Monday against both the Japanese yen and the Australian dollar – though they were modest on both sides. For the technically minded, GBPUSD has closed in on meaningful overhead after a strong rally that hasn’t suffered any notable corrections. If we needed a fundamental reason to ease our acceptance of the initial climb, Chancellor of the Exchequer Osborne suggested there was a decision made on possibly lowering the 50 percent tax on top earners as officials had made accommodation for “lifting low-income people out of tax.”

Japanese Yen: Nikkei 225 Back to its Pre-Earthquake Levels, No Benefit to Currency

Japan has slowly worked its way back from the devastating economic and social impact of the Tohoku earthquake back on March 11th of last year. A milestone for the region’s financial sector, the benchmark Nikkei 225 equity index finally posted its highest close since that tragic day. However, the recovery that this development suggests doesn’t really benefit the yen. Unlike the dollar which sees its growth outlook boost monetary policy expectations, this particular recover comes via still-expanding levels of stimulus. This isn’t a funding currency in question.

Data for the kiwi dollar over the opening 24 hours of this trading week was a notable improvement, but the influence it would have on the currency was notably lacking. The Westpac consumer confidence survey for the first quarter rose to a 102.4 reading following the biggest drop in three years at the previous read. Also notable, the service sector PMI report advanced to 55.5. Both of these are notable, not a ways from impressive records. More interesting is the highest 12-month rate forecat (32 bps) since November 4th.

Gold Volatility Settling, Gains Not Matching Dollar’s Losses

Volatility behind gold has notable settled. However, it is in comparison of its performance to the US dollar that we really see disappointment seep in. While the greenback posted notable progress in its bearish move these past three active trading days, gold essentially maintained an essence of consolidation. As one of the metal’s primary catalysts, the tempered response to the dollar sets a bearish tone going forward. Gold bugs should be ready if the dollar move onto a strong bounce.